3 Strategies to Help Prevent Long-Term Capital Gains Tax
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Real estate is an excellent investment for those looking to build long-term wealth, but it requires perseverance and financial resources to procure and maintain. Investing in real estate can provide continual indirect earnings, making it an attractive investment option for future financial strength. However, it is essential to have both technical and practical knowledge, as there are certain taxes and maintenance charges associated with it.
One notable tax to consider is the capital gains tax, which is the income generated when selling a property asset such as land, residential houses, or commercial buildings. The tax rate varies based on whether it’s a long-term capital gain (scheduled for more than two years) or a short-term capital gain (scheduled for up to two years), with rates of 20% for long-term capital gains and varying rates depending on tax slabs for short-term capital gains.
Applying Exemption under Section 54F
Fortunately, there are ways to reduce capital gains taxes in India. The first method is to apply for exemptions under Section 54F, which allows individuals to invest the sale income collected from selling an old property in a new property to avoid paying capital gains tax. This option is only applicable to one residential property and requires purchasing the new property one year before selling the old house, with a requirement to not sell the new house for the next three years of purchase or home completion date.
Buy Capital Gain bonds under Section 54EC
The second way to reduce capital gains tax is to buy capital gain bonds under Section 54EC, which can provide an annual interest of 5-6%. If you buy capital gain bonds using the sale proceeds, it would be exempt from capital gain tax. However, these bonds cannot be auctioned or switched to anyone, and you should invest the dividend within six months of selling the possession.
Capital Gains Accounts Scheme
Lastly, investing in a Capital Gains Accounts Scheme can be profitable, especially if you don’t want to buy a new residential property right away. You can invest the money you get from selling a possession in a public sector bank or other banks authorized by the capital gains account scheme of 1988.
These are three of the most suitable ways by which you can get exempted from paying capital gain taxes while investing in real estate. It is essential to understand these options and their implications to maximize your profits and reduce taxes.
Prakash Pandey
Real Estate Expert
Co-founder and director Prakash Pandey is in charge of all acquisition, disposition, and property analysis activities at Curoso Consulting. Prakash has been in charge of buying, renovating, and selling unmanaged, distressed, or undervalued assets since the company was founded in 2012.
Real estate doesn’t kill people; debt does. Delivering outsized returns without taking outsized risks is one of Prakash’s primary investing objectives.
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Increase Liquidity
Reducing your debt is a fantastic approach to protect your wealth, as we indicated above. To boost your overall liquidity is a related tactic. Real estate is a kind of assets that is fundamentally illiquid. Real estate transactions are more difficult than, instance, trading in stocks, which can be done with the touch of a button. Sell underperforming assets to increase cash and recession-proof your portfolio. It will be simpler for you to invest during a recession when real estate prices decline and lending becomes more restrictive if you have more cash on hand.
Where to Invest before Recession?
Economic downturns are unavoidable. A recession will happen eventually; the question is not if but when. If they believe a recession is imminent, some investors may get paralysed with fear and refrain from making real estate investments as a result. Smart investors, on the other hand, will keep making investments while also taking a number of measures to recession-proof their real estate portfolio.
Diversify Your Portfolio
Diversifying your holdings is one approach to protect your real estate investment portfolio. Diversification can take many different forms, such as investing across several asset classes and geographical areas.
Ideal Time to Invest
The famous remark “the ideal time to buy is when there’s blood in the streets” is attributed to Baron Rothschild, a British nobleman from the 18th century and a member of the Rothschild banking dynasty. Warren Buffett frequently uses this quote and has traditionally used this tactic. Essentially, Rothschild (as well as Buffett) are arguing that a recession is an excellent opportunity to make investments. Be prepared and willing to profit on people’s reluctance to invest in real estate during a recession. This is when some of the best deals can be made.
Particularly, a downturn might be a fantastic opportunity to buy up properties in core markets. In advance of a recession, many investors will get into trouble (usually by being overly leveraged). During a recession, many people will be compelled to sell their desirable homes at a loss, which allows an investor who otherwise couldn’t afford them to purchase them. Any recession should be used as a chance to invest in premium markets while you can.
